A. Humenuk (613) 957-2135
OCT 24 1988
Dear Sir:
Re: Income Tax Regulation 1100 (2.2)
We are replying to your letter dated August 9, 1988, wherein you requested our views on Regulation 1100(2) of the Income Tax Act (the "Act").
You have asked us to confirm that, for the purpose of Regulation 1100(2.2), a taxpayer may include a partnership. You have also asked us to confirm that a majority interest partner as defined in subsection 97(3.1) of the Act does not deal at arm's length with the partnership.
It is our opinion that a partnership may be considered to be a taxpayer for the purposes of Regulation 1100 (2.2) because subsection 96(1) of Act requires a partner to compute his income as if the partnership was a person and thus a taxpayer.
The question of whether a particular partner is dealing at arm's length with a partnership is a question of fact. Unlike a corporation and its shareholders, the relationship between a partnership and its partners is not stated specifically in the Act. It is necessary to look through the partnership to the partner(s) to determine who controls the partnership. While we agree that a majority interest partner would likely not be dealing at arm's length with the partnership, a partner's profit interest is not the only factor in determining whether a particular partner is dealing at arm's length with the partnership. For instance, where a particular partnership agreement gives control to one or more partners (as in the case of a general partner in a limited partnership), that partner is not dealing at arm's length with the partnership. We are of the opinion that a partner will not generally be considered to deal at arm's length with the partnership unless there "is evidence to the contrary.
In summary, while we agree that Regulation 1100 (2.2) would apply to most cases of a transfer of property from a partner to a partnership or vice versa, it would be necessary to examine the pertinent facts of each situation to determine whether the partner in question was dealing at arm's length with the partnership and whether Regulation 1100 (2.2) and (2.3) applied to that particular situation.
Yours truly,
ORIGINAL SIGNED BY ORIGINAL SIGNÉ PAR
P. D. FUOCO
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch